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Competing in a Cutting-edge Future: Insurance Industry Outlook 2018

Despite huge second-half 2017 disaster claims from hurricanes and wildfires, there seems to be cautious optimism for improving conditions for U.S. property-catastrophe insurers as 2018 unfolds. In contrast, except for auto insurance, a soft property and casualty (P&C) market continues to prevail, with global insurance renewal rates falling for the seventeenth consecutive period in the second quarter of 2017.¹ That was partly due to an overabundance of capital—particularly in the U.S. market—with the industry’s surplus reaching an all-time high of $719.4 billion as of Sept. 30, 2017.² Even record storm losses would be unlikely to put more than a temporary dent in those reserves, most likely making last year’s disaster losses earnings events rather than posing any serious capital concerns for most primary insurers. That said, property reinsurers and those issuing insurance-linked securities may be harder hit over the long term as mounting catastrophe claims are settled.

Gary Shaw

On the other side of the industry, life insurance and annuities (L&A) could be a harder sell in the U.S. in 2018, given the potential impact of new fiduciary standards set by the U.S. Department of Labor on the sale of retirement-related products. While the final form and implementation of the fiduciary rule has been delayed, many insurers already made substantial changes in their business model to accommodate the anticipated regulation, and most are unlikely to turn back the clock at this point, instead adapting to their new operating environment.

A similar challenge faces carriers in the United Kingdom, where “pension freedom,” established two years ago, allows pensioners to draw down their retirement accounts at will. Before the rule change, most retirees had purchased annuities offering regular payments for life. Annuity sales have plummeted 91% since “pension freedom.”³

Growth Prospects on the Horizon

Emerging markets—particularly China, now the world’s third-largest insurance market—appear to be a better bet for rapid growth, at least on a percentage basis, especially for P&C insurers.4 In addition to expected hikes in property-catastrophe premiums, particularly for reinsurance, a large share of U.S. P&C premium gains is expected as a result of higher auto insurance rates (which were already rising in 2017 due to worsening loss frequency and severity). Despite the price increases, profitability could remain elusive, given the multitude of emerging risk factors confronting auto carriers, such as the rise in distracted driving and the proliferation of sensor-laden vehicles, which tend to be more expensive to repair. Recent disaster losses are exacerbating this trend, as Hurricane Harvey is believed to have damaged more vehicles than any storm in history—perhaps as many as one million.5

Jim Eckenrode

On the L&A side, insurers can still recover their footing in 2018 if interest rates are raised on a more regular basis. There are already some positive signs. The gap is widening between what consumers can earn on fixed annuity contracts and bank certificates of deposit, with annuity holders having the added benefit of tax-deferred status on gains.6 And while the life policy count fell by 4% in the second quarter of 2017 and 3% in the first half, new annualized premiums were actually up 4% in the first half.7

The individual market is just one channel where L&A insurers can seek growth. Group life sales—which have the advantage of guaranteed issue and little, if any, direct contact with the insured—have surpassed individual policy purchases for the first time.8 While nearly five million more U.S. households had life insurance as of 2016 than in 2010, those gains were fueled by population growth rather than higher market penetration, which remains at its record low of just 30%.9 To accelerate growth, L&A insurers should consider simplifying their products and streamlining their application process to make policies easier to understand, underwrite, and purchase.

An Improving Outlook for M&A

Although the number of insurer transactions in the first half of 2017 was down 5% from the same period in 2016, aggregate transaction size was substantially larger,10 and some industry observers are predicting a more positive outlook for insurance industry M&A in 2018. One potential M&A driver is digitalization, with insurers seeking to enhance distribution, customer experience, data collection, advanced analytics and operational efficiency by homing in on InsurTech investment and acquisition targets. Outright purchases of InsurTechs are relatively few to date,11 but nearly half of global insurers recently surveyed expect to make deals over the next three years to acquire new technologies, and 14% of those expect to make more than one acquisition.12

The Push for Digitalization

As insurers continue to be challenged by evolving customer needs and expectations amid heightened competition, many have resorted to belt-tightening and doing more with less to shore up returns. However, as the pace of productivity improvements slows with existing staff and systems, many carriers are looking to boost their transformation efforts by integrating more advanced automation, fueled by software applications that run automated tasks, also known as bots, as well as machine-learning algorithms.

Robotic process automation and cognitive intelligence technologies are providing insurers an opportunity to reduce expenses, and possibly reinvent how they conduct business. Eventually, these and other InsurTech solutions could fundamentally alter existing in-house operations. Indeed, a report by the World Economic Forum, in collaboration with Deloitte, forecasts a potential scenario where cognitive technologies are so pervasive that underwriting becomes much more automated than today, perhaps leading to the emergence of third-party underwriting specialty providers.13

While traditional insurers should consider leveraging the latest technologies to improve their top and bottom lines, it is becoming clear they are not going to be run out of business by InsurTech disruptors anytime soon. Insurers still have a lot to offer in terms of capital, market reach, brand recognition, product design and infrastructure. Most are recognizing InsurTechs as potential collaborators rather than competitors, and vice versa. Insurers that make digital transformation not just a priority, but a continuous improvement process, are most likely to reenergize their cultures, as well as grow their top and bottom lines.

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